One of the best ways to avoid disputes with other partners is to communicate clearly and often. In fact as a fiduciary, you have the duty to report/disclose when you are the managing general partner. I like the phrase, “care and feeding of your partners”. Partners need communications so that most surprises will be pleasant ones and not unexpected unpleasant events.
Your partners need to know what are the costs or expenses of the partnership. Items such as real estate taxes, insurance, maintenance and management must be disclosed. The more that the partners know about the expenses, the better understanding they will have in the event of a surprise. A surprise may be in the form of a loss of a tenant or even a break in the water main. Whatever the unexpected occurrence, the partnership should have adequate funds available or the ability to raise the funds easily.
A good suggestion is to provide the partners with financial statements prepared by a management company or an accountant at least annually. Transparency in partnership operations provides the partners with an understanding that real estate is a working business and not a bond. In the case of a partnership, the participants should be aware of the fact that distributions are not always constant and may be interrupted for long or short periods of time.
As a fiduciary, you must be aware of market conditions that may affect the value or use of the real estate. If a market is changing from industrial to offices uses, than the value of the property may be affected positively or negatively and that disclosure must be conveyed.
Most commercial real estate loans are not fully amortized and therefore, the partners must be aware of the fact that the property must be refinanced at the termination of the existing loan. Most loans on commercial properties are 10 years in length, and that rather short term, may leave a large percentage of the remaining balance unpaid. Why the fiduciary must disclose this fact to the partners is because of changing interest rates in the market place over the term of the loan may have dramatically changed. This change in interest rates for loans may have a positive or possibly negative effect on cash distributions. The managing partner must prepare the investors for this event.
In conclusion, real estate is not static and changes occur through the years. Most events should be positive if held for the long term. There is no guarantee that there will not be disputes in your partnership but reasonable reports may mitigate the damage and help the success of the partnership.
